IEA report condemns World Bank "pension privatisation" model

A report published today by the Institute of Economic Affairs* condemns the pension privatisation model that has been promoted by the World Bank and which has provided a blueprint for reform in South America and Central and Eastern Europe.

The report argues that compulsory private pension schemes have often been implemented in countries where the basic financial infrastructure is poorly developed. As such, they provide families with little security and undermine other methods of saving and other provision for old age that families find valuable. Compulsory private pension funds are often so highly regulated that "privatisation" occurs in name only.

State social security in under-developed and middle-income countries, the report argues, produces even worse outcomes with pensions often being undermined by inflation, corruption or as a result of the government taking social security funds and using them for general spending. State social security systems also lead to reduced fertility (by reducing the need for extended family support) and earlier retirement, thus undermining the finances of a pay-as-you-go system.

The authors propose that the government should not be at the centre of social security or pension provision - either by providing its own system or through mandating private provision. Instead, the government should focus on ensuring that the rule of law prevails, that corruption is minimised and, most crucially, that legal systems are in place so that long-term, secure savings institutions can be developed that can invest in the private sector.

Commenting on the report, IEA Editorial and Programme Director, Philip Booth, said, "The recent experience of Argentina illustrates the problems graphically. So-called pension privatisation involved mandatory saving in highly regulated schemes. The government then came along and expropriated the funds. What we need the state to provide is a strong legal framework and then the financial infrastructure will be developed. At that point individuals and families will make their own provision because they know that their long-term savings will be secure."

The report shows how individuals and families make old-age income provision in a variety of ways  through voluntary private saving, continuing informal working, as well as through parenthood and kinship networks - and argues that the states job should be to support and not undermine the institutions that make this possible.